Report for the Hearing delivered in Case 226/85

I — Facts and procedure

1. Article 14A (1) of Commission Decision No 234/84/ECSC of 31 January 1984 on the extension of the system of monitoring and production quotas for certain products of undertakings in the steel industry (Official Journal 1984, L 29, p. 1) provides that: ‘If on 1 April 1984 the Commission establishes after examination that steel plant closures after 1 October 1982 have had the effect, where a category of products is concerned, of increasing by at least 5% the ratio in that category between the reference production of all the undertakings covered by the quota system and their production potential on 1 October 1982, the Commission may grant an adjustment to the quotas in this category of products, calculated in accordance with the rules set out in paragraph 3, to undertakings which make an application to this effect before 1 April 1984 and which satisfy the conditions set out in paragraph 4’. Article 14A (2) provides that the Commission will carry out further examinations for the different categories of products at the beginning of each quarter and grant adjustments to undertakings which have made an application to this effect if the ratio has increased because of closures by at least 5% compared with what it was when the last adjustment was made. Article 14A (4) reads as follows:

‘An undertaking may benefit from an increase in quotas pursuant to this article only if:

it has not increased its capacity since 1 July 1983,

since 1 October 1982 it has not carried out plant closures giving rise to a significant increase in its utilization rate,

its viability is assured without structural adjustment,

and if during the 12 months preceding the quarter in question:

it did not receive aids authorized by the Commission with a view to covering operating losses,

it was not the subject of penalties in respect of the price rules, or paid fines due’.

2. By letters dated 23 March, 26 July and 16 October 1984 and 15 January and 16 April 1985, the applicant requested an adjustment of its quotas for category II pursuant to Article HA of Decision No 234/84 for the first two quarters and the third and the fourth quarters of 1984 and the first and the second quarters of 1985 respectively. By letter dated 12 June 1985, received by the applicant on 18 June 1985, the Commission referred to the various requests as supplemented at different meetings between the applicant and the Commission and communicated its decision not to grant them in the following terms:

‘The Commission has made the following findings :

Where the conditions laid down in Article 14A of Decision No 234/84/ECSC are satisfied, the Commission may grant certain additional quotas. The latter however presuppose that the undertaking in question has already been restructured and therefore no longer needs aid.

The Commission was informed of your proposed restructuring by a letter dated 30 January 1984. The plan provides for the closure of production plants in 1985 and for the grant of aid. It is therefore not possible to say that your undertaking has already been restructured.

The Commission has therefore adopted the following decision:

1) Article 14A of Decision No 234/84/ECSC does not apply to your undertaking.

2) This decision applies for the period up to the end of the second quarter of 1985.’

3. In the letter of 30 January 1984, referred to in the contested decision, the Government of the Federal Republic of Germany requested, pursuant to Commission Decision 83/392/ECSC of 29 June 1983 concerning the aids that the German Government proposed to grant to the steel industry (Official Journal 1983, L 227, p. 8), definitive authorization from the Commission to pay certain aids, including aid to the applicant to finance its proposed restructuring for which a grant of 20% of the total investments of DM 411500000 had been requested under the German law on investment grants for investments in the steel industry. On 7 May 1984 a restructuring plan submitted to the Commission pursuant to Commission Decision No 3302/81/ECSC of 18 November 1981 on the information to be furnished by steel undertakings about their investments (Official Journal 1981, L 333, p. 35) was the subject of a favourable opinion by the Commission delivered pursuant to the third and fourth paragraphs of Article 54 of the ECSC Treaty. The opinion took account of the fact that the plan simultaneously improved the metal quality, surface, tolerances and dimensions, enabled the applicant to meet changes in demand, and involved a reduction in production capacity of heavy plate amounting to 360000 tonnes per year. In a letter dated 2 May 1985 the Commission granted the request of the Government of the Federal Republic of Germany and authorized the proposed aid to the applicant. The Commission considered that the conditions laid down in Decision 83/392 of 29 June 1983 were satisfied and the criteria set out in Commission Decision No 2320/81 of 7 August 1981 establishing Community rules for aids to the steel industry (Official Journal 1981, L 228, p. 14) were complied with. In the authorization it was stated that the applicant was contributing to the total reduction in production capacity stipulated in Decision 83/392 by a total net reduction in its plate capacity of 360000 tonnes per annum and that the Commission considered that, according to information given by the applicant in answer to the Commission's financial questionnaire, there was a very strong likelihood that in normal market conditions the undertaking would once again become financially viable by 1986 without further aid. Pursuant to Decision 83/392 the Commission nevertheless requested that the six-monthly reports on aid granted should contain information on the progress the applicant had made towards restoring financial viability. The investment grant paid to the applicant after alteration of its investment programme amounted only to DM 49 million.

4. On 23 July 1985 the applicant brought the present action.

5. Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General the Court decided to open the oral procedure without any preparatory enquiry. By a decision of 3 July 1986 the Court assigned the case to the Second Chamber.

II — Conclusions of the parties

1. The applicant claims that the Court should: (i) Declare void the Commission decision of 12 June 1985 which was notified to the applicant on 18 June 1985 refusing to apply to the applicant Article 14A of Commission Decision No 234/84 of 21 January 1984 for the period up to the end of the second quarter of 1985; (ii) Order the defendant to pay the costs.

2. The Commission contends that the Court should : (i) Dismiss the action; (ii) Order the applicant to pay the costs.

III — Submissions and arguments of the parties

A — Arguments of the applicant

The applicant makes two submissions against the contested decision: the infringement of Article 14A of Decision No 234/84 and infringement of essential procedural requirements ih so far as the statement of reasons is concerned.

As regards the first submission the applicant claims that in basing its refusal to adjust the quotas solely on the ground that restructuring measures were foreseen for 1985 and that aid had been requested for that purpose, the Commission is making completion of the restructuring a condition for the application of Article 14A. Such an interpretation is contrary not only to the wording of Article 14A (4), which stipulates only that the viability of the undertaking should be assured without structural adjustment, but also to the spirit of the provision which is that the only undertakings to be excluded are such as need to carry out structural adjustments and in particular to close plant in order — after restructuring — to become viable without aid. The Commission's interpretation amounts to penalizing undertakings which do not need to carry out structural adjustments and that cannot be the aim of the provision.

As regards the second submission the applicant claims that in so far as it referred only to planned restructuring the contested decision did not take account of the conditions set out in Article 14A (4) and did not reach any conclusion on the only decisive condition, namely viability without structural adjustment. In those circumstances the decision did not contain an adequate statement of the reasons on which it was based as required by Article 15 of the ECSC Treaty (cf. in particular the judgment of the Court of 20 March 1959 in Case 18/57 Nold KG v High Authority [1959] ECR 75).

The Commission has obviously not considered in detail the question of the applicant's viability. Even accepting that the Commission in its decision has shown that it considers that the applicant's viability has not been assured without structural adjustment, the statement of reasons is defective. No justification is given for that finding. The Commission should have considered the applicant's general economic situation, the kind of investment plan and the nature of the aid requested.

Had those factors been considered, the Commission could obviously not have concluded that the applicant was not viable. The Commission could have considered the matter on the basis of the information available to it, especially from the financial questionnaires submitted since 1983 and the reports for the financial years from 1979 onwards.

As regards its general economic situation, the applicant maintains that it has a solid position on the steel market and has become highly competitive. It is one of the few undertakings in the market which since the beginning of the steel crisis has almost constantly traded at a profit. The profit and loss balances from 1978 to 1985 on a turnover which is generally in excess of DM 2000 million show the following results :

Only 1983, which was particularly difficult solely for conjunctural reasons, led to a loss which was carried over to the following year and completely reabsorbed in a profit of just under DM 25 million. The Commission could not have based its judgment on that single negative result. A serious assessment necessarily presupposes consideration of the results over several years and likewise consideration, also over several years, of the liquidity, cash flow, ratio between own and borrowed capital, financial costs, net investment in fixed assets, investments and depreciation.

As to the nature of the restructuring measures, the applicant says that while restructuring is not of significance in itself under Article 14A since the criterion is that viability should be assured before restructuring and without aid, the investments related mainly to improvement of a rolling mill as a result of the use of advanced technology and the transformation of another rolling mill for the sole production of semifinished products which were not subject to quotas. Those investments were part of the applicant's long-term investment policy whose object was to bring the share of special steel up to more than 40% of production and to improved the manufacture of heavy plate. In accordance with the analysis made by the Commission in its reasoned opinion of 7 May 1984 the investments helped, by means of technical innovation and a concentration of effort on the qualities of products particularly in demand, to improve the applicant's already favourable competitive position for the future. Although they meant a reduction of production capacity of heavy plate, the restructuring measures involved noplant closure. On the contrary, between 1980 and the end of 1985 the applicant took on 500 additional employees. Such restructuring cannot be seen as any indication of lack of viability.

As to the nature of the aid, the applicant points out that aid is of no significance in itself under Article 14A, but states that the investment grant paid to it in no way presupposes, according to the legal provisions relating to its grant, that the undertaking is not viable. The fact that the Commission in its decision addressed to the Government of the Federal Republic of Germany authorizing the aid expressly mentions that the applicant may ‘return’ to profitability is irrelevant. The Commission itself is solely responsible for that wording and it is not a statement of reasons. At no time had the applicant given the national authorities to understand that it was not viable without aid and they in turn in their request for authorization had not given any such indication either.

Finally, as regards use of the criteria drawn up by the Commission in the rules for aids in relation to the procedure for authorizing aids, the applicant claims that the criteria are insufficient and irrelevant for the purposes of Article 14A. The term ‘viability’ is not defined either in the ECSC Treaty or in other Community provisions. The viability of a steel undertaking must be regarded as assured when depreciation is sufficient for the replacement of assets, interest on borrowed capital can be paid when due, and profits have been made and are forecast over a number of years. There is no good. reason for requiring, before accepting that an undertaking is viable, a minimum return of 3.5% on own capital, because it would be more in the interest of the applicant's shareholders to receive a lower return on capital than to have the undertaking go into liquidation.

B — Arguments of the Commission

The Commission considers it appropriate to have regard to the purpose of Article 14A, its place in the system of quotas and the factors which connect it with the rules for aids laid down by Commission Decision No 2320/81 of 7 August 1981.

Decision No 234/84 distinguishes between two classes of undertakings: those which need to be restructured and the rest. That establishes the connection with the rules for aids since restructuring, for which the Member States are authorized to grant aid, can have no aim other than to restore competitiveness to the undertaking and make it financially viable without aid under normal market conditions (first indent of Article 2 (1) of Decision No 2320/81).

In order to encourage the former class of undertakings to implement their restructuring plans speedily Article 14B provides for the possibility of granting them additional quotas subject to certain conditions. However, in order not to place the latter class of undertakings at a disadvantage, that is to say those which do not need to be restructured and are not seeking aid for that purpose, Article 14A provides for the possibility of obtaining certain additional quotas by way of compensation and subject to certain conditions.

The Commission states therefore that it agrees with the applicant in its interpretation of Article 14A to the effect that the only undertakings to be excluded are those that need structural adjustment and in particular to close down plant in order to ensure that after restructuring they will be viable without aid. It is moreover clear from the statement of reasons for Article 14A, inserted by Commission Decision No 2177/83 of 28 July 1983 (Official Journal 1983, L 208, p. 1), that the undertakings contemplated are such as are already restructured and thus no longer receive any aid.

The Commission does not deny that, in comparison with other steel undertakings the applicant is modern and successful and that its investment was directed towards technical innovation, but it has not the least doubt about the category into which the applicant should be placed. Since it has submitted a restructuring plan and requested certain state aids it must necessarily be regarded as an undertaking which needs restructuring and whose viability is not assured without structural adjustment. In accordance with the provision of the first indent of Article 2 (1) of Decision No 2320/81 the Commission expressly stated when authorizing the grant of aid on 2 May 1985 that it considered that there was a good chance that the applicant could restore its financial viability. Moreover, if it transpired that the applicant's viability was assured without restructuring, the conditions for the authorization of aid would not have been satisfied and the Commission would have to revoke the authorization and require the refund of the aid.

The Commission contends that it is clear from the contested decision that the Commission did not regard the applicant's viability as assured without restructuring. Although it did not use the same wording as^ Article 14A, the decision paraphrased the decisive criterion, namely that the undertaking should already be restructured and should therefore not receive further aid; that wording was based on the statement of reasons contained in Decision No 2177/83 and had the same meaning as a guarantee of viability without restructuring. The fact that the decision stresses the closure of plant and the requests for aid clearly shows precisely that in the Commission's view the applicant's viability was not assured. According to the case-law of the Court (cf. Joined Cases 275/80 and 24/81 Krupp Stahl AG v Commission [1981] ECR 2489, at p. 2512) there can be no question of there being no statement of reasons.

The Commission says that the notion of viability is a term of an and it has developed a method for assessing it under the rules for aids. That method involves an analysis of figures, the results of which were not included in the contested decision in the applicant's case for reasons of expediency. The criteria and the assumptions on which the financial forecasts were to be based were mentioned in the 12th, 13th and 14th reports on competition policy and the applicant must have been aware of them. It follows in particular:

i) that the volume of sales to be taken into account could not exceed the levels achieved in 1980;

ii) that the forecasts should take account of the deterioration in the relationship between prices and costs from 1982 to 1986;

iii) that depreciation should be sufficient to ensure maintenance and replacement of assets after restructuring; and

iv) profits should be sufficient to cover all costs including depreciation and financial charges and to provide a minimum return on capital.

A study of the applicant's viability in 1986 conducted in connection with the authorization of aid and on the basis of figures submitted by the applicant leads to the following results:

As the Commission indicated in the decision authorizing aid the applicant was only just viable since the results for 1986 do not quite provide sufficient return on capital, which the Commission considers should be about 3.5%. It is clear from the study that if the applicant did not carry out restructuring measures there would be a loss of DM 43.2 million and if restructuring measures were undertaken without any aid there would be a profit of only some DM 15.8 million.

O. Due

Judge-Rapporteur

1 Language of the Case: German.